A failure to communicate: MCI WorldCom, Sprint critics come out swinging

Lawyers for MCI WorldCom and Sprint faced a barrage of questions and criticisms about their proposed merger from industry and consumer critics last week at a public forum called by the FCC.

FCC staff members gave little indication about how the commission might rule on the $129 billion deal announced last October. If anything, the three-hour exchange showed the extent of disagreement on the facts of the case.

For the merger to proceed, the FCC must find it is in "the public interest," a standard that means promoting competition (see textbox). The Department of Justice, the European Commission and several states also are reviewing the case.

According to critics, a combined MCI WorldCom and Sprint would create a company that dominates the long-distance and Internet backbone service markets. As a result, the proposed merger would create an illegal monopoly, critics said.

"We lose a major competitive catalyst," testified the Rev. Jesse L. Jackson of the Rainbow/PUSH Coalition.

If the two companies merge, long-distance prices could increase 5%, said Jerry Hausman, a Massachusetts Institute of Technology economics professor who testified for SBC Communications.

MCI WorldCom and Sprint officials denied the merger would hurt long-distance competition.

Michael H. Salsbury, MCI WorldCom's general counsel, cited low barriers to entry, ever-increasing network capacity and falling prices as reasons the merger should be approved. Almost every LATA in the U.S. has three or four facilities-based interexchange carriers (IXCs) - a fact that would not change post-merger, he added.

The residential long-distance market already has too few significant competitors, said Gene Kimmelman, co-director of the Washington office of the Consumers Union. "The fundamentals of this market have not changed all that dramatically," he said. "The reality is a highly concentrated long-distance market."

Although there are about 600 IXCs, the Big Three (No. 1 AT&T, No. 2 MCI WorldCom and No. 3 Sprint) control about 80% of the residential market. The next-largest competitor, Qwest Communications, has a 2.5% market share.

The proposed merger would diminish consumers' choices, especially low-volume callers who make less than $4 per month in long-distance calls, Kimmelman said.

It is possible to aggregate these low-volume customers' local and long-distance bills to grant them discounts, said Jonathan B. Sallet, MCI WorldCom chief policy counsel. But merger opponents said such an "all-distance" market has not fully emerged.

The merger partners also defended themselves against attacks that they would create a huge wholesaler of Internet backbone capacity that could raise prices and degrade connection quality for ISPs and other customers (Telephony, March 27, page 38). "Carriers don't go around degrading connections because their customers would scream," Salsbury said.

Salsbury and his critics agreed on one point: There is no standard way to measure the Internet backbone market, a point that could prove difficult for regulators as they determine market share and dominance.

Also addressed at the forum was whether the proposed merger would confer public-interest benefits that would not materialize without the merger. Predictably, the two sides also parted ways here.

The new company would more quickly enter local services market, thanks to economies of scale and deployment of a national wireless broadband network, Sallet said.

MCI WorldCom and Sprint do not have to merge to become viable local competitors, opponents said. Alternatives such as a sale or joint venture of their wireless properties also could create the cost savings and national footprint they seek.

THE FCC'S FOUR-PART TEST FOR MERGER REVIEWS

1. Would the merger violate the Telecom Act?

2. Would the merger violate FCC orders or rules?

3. Would the merger frustrate the FCC's ability to achieve the goals of the Telecom Act of 1996?

4. Would affirmative public-interest benefits be realized with the merger that wouldn't be realized without the merger?